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So far, two circuit courts have created their own sub-tests tailored to applyMorrison’s second prong to private rights of action: the Eleventh Circuit developed the passage of title test in Quail Cruises Management v. Agencia De Viagens CVC Tur Limitada, and the Second Circuit established the irrevocable liability standard in

Absolute Activist Value Master Fund Ltd. v. Ficeto.204

Quail Cruises involved a Bahamian cruise ship operator, who had purchased a defective vessel through the purchase of stock of another Bahamian corporation, sued the vessel’s prior owner, a Brazilian corporation, and other defendants, alleging, among other things, securities fraud.205 The plaintiff had purchased a vessel named the M/V Pacific—the Love Boat from the 1970s television show.206The plaintiff acquired the vessel by purchasing all the stock of a corporation, which owned the vessel. 207The stock in question was not listed on a U.S. exchange.208The plaintiff alleged that the defendants had made misrepresentations to conceal the deteriorating condition of the vessel, and the defendants’ misrepresentations had induced the plaintiff to purchase the stock of the corporation that owned the vessel.209

The district court granted the defendants’ motion to dismiss for lack of subject matter jurisdiction, and the plaintiff appealed.210 The district court found that the plaintiff “failed to allege that the purchase or sale of the . . . stock took place within the United

204 Quail Cruises Mgmt v. Agencia De Viagens CVC Tur Limitada, 645 F.3d 1307 (11th Cir. 2011); Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012). 205Quail Cruises, 645 F.3d at 1309. 206Id. 207Id. 208Id. 209Id. 210Id. at 1309-10.

States.”211On appeal, the Eleventh Circuit reversed, finding that the plaintiff had alleged sufficient facts to sustain a cause of action.212

In examining the Morrison decision, the Eleventh Circuit looked at the Supreme Court’s second prong of the transactional test: purchases and sales of securities constituting domestic transactions.213 The Eleventh Circuit noted that the Supreme Court held “that, regardless of whether the underlying fraudulent conduct occurs in or affects the United States, Section 10(b) applies . . . where the security at issue is listed on a domestic stock exchange or, if not so listed, where ‘its purchase or sale is made in the United States.’”214Looking at the allegations in Quail, the plaintiff alleged that its acquisition of the stock in question was consummated in Miami, Florida “by means of the parties submitting the stock transfer documents by express courier.”215 The Eleventh Circuit found that the title was physically transferred within the state of Florida.216 Since, under the purchase and sale agreement, “it was not until this domestic closing that title to the shares was transferred to [the plaintiff],” the sale of the stock occurred within U.S. boundaries.217 The sale was therefore domestic, and the Eleventh Circuit decided that the transaction was within reach of Section 10(b).218

Absolute Activist and two related cases, Cascade Fund, LLLP v. Absolute Capital Mgmt. Holdings, et al., and SEC v. Ficeto, dealt with misrepresentations to investors coupled with manipulation in the OTC market.219In Cascade Fund, plaintiff-investors advanced a single claim of securities fraud under Section 10(b) alleging that a Cayman Islands private fund manager, Absolute Capital Management Holdings, Inc. (“ACM”) invested in unregulated penny stocks, which was contrary to the investment strategy described in

211Id.at 1309. 212Id.at 1310-11. 213Id.at 1310. 214Id. 215Id. 216Id.at 1310-11. 217Id.at 1310. 218Id.at 1310-11.

219 Cascade Fund, LLLP v. Absolute Capital Mgmt. Holdings, et al., 2011 U.S. Dist. LEXIS 34748 (D. Colo. 2011), and SEC v. Ficeto, 839 F. Supp. 2d 1101 (C.D. Calif. 2011).

funds’ prospectuses. Additionally, the funds’ prospectuses and other offering materials had failed to disclose material facts relating to a fund director’s conflict of interest.220 The plaintiffs alleged that ACM solicited U.S. plaintiffs to buy interests in private funds organized under the laws of the Cayman Islands.221 The shares of those private funds were listed on foreign exchanges, and none of the funds’ shares were listed on a U.S. exchange.222Although the funds’ shares were listed on foreign exchanges, the parties and the court focused on private purchases of fund shares away from any exchanges and analyzed the case under the second prong of

Morrison.

The plaintiffs invested by signing a subscription agreement in the United States and sending it to the Cayman Islands for acceptance.223The agreements provided that the fund manager could reject the application for investment “for any reason.”224 Without warning, after plaintiffs had invested, the funds’ manager disclosed that substantial portions of the funds’ capital had been invested in illiquid, U.S. penny stocks.225These investments were contrary to the funds’ prospectuses, and after the announcement the prices of the funds’ shares dropped materially.226

The defendants moved to dismiss arguing that the funds’ shares were not listed on a U.S. exchange and that the plaintiffs’ investments occurred in the Cayman Islands.227The plaintiffs argued that their claims satisfied Morrison’s requirements because the subscription agreements and other offering materials were distributed in the United States, defendants’ employees periodically traveled to the United States to meet with prospective investors, plaintiffs decided to invest in the United States, and plaintiffs wired their investment money to a bank in New York.228

220 Cascade Fund, 2011 U.S. Dist. LEXIS 34748, at *2. 221Id. at *4. 222Id. at *2. 223Id.at *3. 224Id at *3-4. 225Id.at *4-5. 226Id.at *5. 227Id.at *14. 228Id.at *20.

Looking to Morrison, the district court found that the Supreme Court had “stressed that it was the location of the transaction that determined whether the matter was subject to Section 10(b).”229In particular, the district court noted that “Morrisonrejects tests that focus on the locus of the fraud or the effects that it has on domestic investors and instead sets forth a ‘transactional test’ that determines the scope of Section 10(b) ‘whether the purchase or sale is made in the United States, or involves a security listed on a domestic exchange.’”230

Thus, the distribution of the offering documents, the defendants’ employees’ periodic trips to the United States, and the location where Cascade decided to invest were all irrelevant.231 Additionally, as for wiring investment funds to a bank in New York, the district court indicated that this was just a mere step in the investment process; the subscription agreements made clear that wiring money was insufficient to complete the transaction.232 The completion of the transaction according to the agreement, and according to the district court as well, could come about only by the fund manager’s acceptance in the Caymans.233 Citing to Morrison’s holding that “‘the focus of the Exchange Act is not upon the place where the deception originated, but upon purchases and sales of securities in the United States,’” the court granted the defendants’ motion to dismiss.234

SEC v. Ficetowas an SEC enforcement action arising from the alleged fraud at issue in Cascade Fundsand Absolute Activist.235 The SEC charged several defendants with violations of Section 10(b) and Rule 10b-5 based on the defendants’ alleged manipulation of domestic OTC stocks through the use of the Absolute Funds’ capital.236 (The violations alleged in this SEC enforcement action occurred prior to the enactment of Dodd Frank, which reinstated the

229Id.at *13. 230Id.at *13-14. 231Id.at * 22. 232Id.

233Id.

234Id.at *21 (quoting Morrison,561U.S. at 266).

235 SEC v. Ficeto, 839 F. Supp. 2d 1101 (C.D. Calif. 2011). 236Id.at 1103-04.

conducts and effects tests for SEC enforcement actions.)237 The defendants moved to dismiss, arguing that under Morrisonthe SEC’s complaint failed to state a claim on which relief could be granted.238 The court rejected the defendants’ argument.239The court in Ficeto, however, reached its conclusion by an entirely different analytical path than that followed by the court in Cascade Funds.

Based on its extensive analysis of the legislative history of the Exchange Act, the court concluded that domestic OTC transactions, such as trading on Pink Sheets or OTCBB, should be treated the same as transactions on national exchanges in determining the scope of Section 10(b)’s territoriality.240 The fact that a party traded in a domestic OTC market, such as OTCBB or Pink Sheets, is sufficient to treat the transaction as domestic without further proof being offered of the transaction’s location.241In other words, the court in Ficeto found that transactions in the U.S. OTC market passed muster under the first prong of Morrison.242

The district court found that the MorrisonCourt had tackled the issue of whether Section 10(b) provides a foreign plaintiff with a cause of action against foreign and domestic defendants “for misconduct in connection with securities traded on foreign exchanges,” but that the Supreme Court was silent as to whether a cause of action could exist with similar parties concerning securities fraud in the domestic OTC market.243The bright line transaction test, then according to the district court, differentiates between foreign and domestic exchanges, and “not between domestic exchanges and the domestic over-the-counter market.”244Specifically, “transactions on the domestic over-the-counter market are as inherently imbued with our national interest as trades on national exchanges.”245

The court in Ficetopointed to the language of the Exchange Act, which makes clear that the goal of the Act was “‘to provide for

237See supranote 4. 238Id. at 1106. 239Id. at 1108.

240Id. at 1109-10. (citing S. Rep. No. 73-792, at 6 (1934). 241Id. at 1110.

242Id.

243Id. at 1108-09. 244Id. at 1109. 245Id. at 1108.

the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.’”246 The court also drew on the Exchange Act’s accompanying Senate Report which addressed “the ‘unorganized “over-the-counter” markets’” emphasizing that it is “‘vitally necessary’ to provide the Commission with authority ‘to subject [over-the-counter markets] to regulation similar to that prescribed for transactions on organized exchanges.’”247 The court concluded that, “the textually grounded purpose of the Act is to treat securities on the domestic over-the- counter market . . . similar to securities traded on national exchanges, having drawn no distinction in articulating the need to regulate both.”248

The court further noted that market manipulation of OTC securities is a type of securities fraud that Section 10(b) was meant to address.249 Indeed, in looking at the Exchange Act, “Congress specifically and explicitly designated some provisions to be applied only to securities traded on national exchanges, other provisions to be applied only to securities traded on the over-the-counter market, and still others to cover both national exchanges and the over-the- counter market.”250 In doing so, Congress qualified and restricted the purposes of some of the sections of the Act (e.g. Section 9(a)(1) prohibits any person from manipulating trading “in any security registered on a national securities exchange.”)251 Section 10(b), however, contains no such restriction as it provides for “any security registered on a national securities exchange or any security not so registered.”252

246Id. at 1109 (citing Securities Exchange Act of 1934, 48 Stat. 881 (1934)).

247Id. at 1109-10 (citing S. Rep No. 73-792, at 6 (1934). 248Id. at 1110.

249Id.

250Id.

251Id.

The court also looked at the judicial history of Section 10(b)’s application to fraud in the OTC markets.253 The court found that there was broad acknowledgement among the courts of a congressional intent to treat transactions on a national exchange and transactions on over-the-counter market similarly in enacting this legislation.254 To further support this position, the district court specifically referred to the Supreme Court’s decision in Ernst & Ernst v. Hochfelder: “The 1934 Act was intended principally to protect investors against manipulation of stock prices through regulation of transactions upon securities exchanges and in over-the- counter markets, and to impose regular reporting requirements on companies whose stock is listed on national securities exchanges.”255 Finally, the district court in Ficetoalso emphasized that courts from multiple jurisdictions “have consistently cited specific textual provisions in holding that the Exchange Act applies to market manipulation on the over-the-counter market.”256

Absolute Activist Value Master Fund Ltd. v. Ficetoinvolved the same Cayman Islands hedge funds that were at the center of the

Cascade Fund case litigated in the district court in Colorado as discussed above. 257 The Second Circuit issued its opinion nearly fourteen months after the Colorado district court’s decision in

Cascade Fund, and more than three months after the California district court issued its SEC v. Ficetodecision. In Absolute Activist, the hedge funds themselves were the plaintiffs. They sued several defendants, including a U.S. resident and a U.S.-based, SEC- registered broker-dealer.258 Rather than alleging fraud in the offer and sale of interests in the Absolute Activist funds themselves, as in

Cascade Fund, the plaintiff-hedge funds in Absolute Activist alleged fraud in connection with the use of the investor hedge funds’ capital to buy and sell stocks in the U.S. OTC markets.259 The case

253Id. at 1111 (quoting Ernst & Ernst v. Hochfelder,425 U.S. 185, 195 (1976)).

254Id.

255Id. at 1111. 256Id.

257 Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60 (2d Cir. 2012)

258Id.at 64-65. 259Id. at 63.

required the court “to determine whether foreign funds' purchases and sales of securities issued by U.S. companies brokered through a U.S. broker-dealer constitute ‘domestic transactions’” pursuant to

Morrison.260

The complaint alleged that the defendants selected the stocks of several thinly-capitalized companies which were traded in the U.S. OTC markets, and used the hedge funds’ capital to buy “billions of shares of these thinly capitalized U.S.-based companies (the ‘U.S. Penny Stock Companies’) directly from those companies.”261About the same time that the defendants acquired these thinly capitalized shares, “the U.S. Penny Stock Companies registered their shares with the SEC.”262 The defendants then “artificially inflated the prices of their stocks by trading and re-trading the stocks, often between and among the plaintiff hedge funds, each time trading the stocks at a higher price to create the illusion of trading volume.”263 Subsequently, when the prices of the stocks reached the levels desired by the defendants, the defendants sold the shares.264

The defendants moved to dismiss on several grounds, chief among them the “failure to state a claim, lack of personal jurisdiction and improper venue.”265After oral arguments were heard, the district court dismissed the complaint due to lack of subject matter jurisdiction.266On appeal, the Second Circuit reversed the dismissal on subject matter jurisdiction grounds, but upheld the dismissal because the plaintiffs had failed to state a claim under Section 10(b) and Rule 10b-5 in light of the Supreme Court’s decision in

Morrison.267

The defendants contended that Morrisonapplied because the plaintiffs and defendants were foreign.268 The plaintiffs countered that Morrison was not applicable because some of the defendants, such as the broker-dealer, were located in the United States and the

260Id.at 62. 261Id.at 63. 262Id. 263Id. 264Id. at 63-64. 265Id.at 65. 266Id. at 67. 267Id. 268Id. at 69.

OTC securities that were purchased by the defendants were domestic.269 The Second Circuit thus had to consider whether the allegations of the complaint were “sufficient to allege the existence of domestic transactions.”270

The Second Circuit first sought to determine what is a domestic transaction under Morrison. Noting that Morrison

“provides little guidance as to what constitutes a domestic purchase or sale,” the Second Circuit examined how the terms purchase and sale were defined in the Exchange Act.271Looking at Section 3 of the Exchange Act, the Second Circuit noted that “the terms ‘buy’ and ‘purchase’ each included any contract to buy or purchase or otherwise acquire” and “the terms ‘sale’ and ‘sell’ each include any contract to sell or otherwise dispose of.”272 Looking at prior decisions by the Supreme Court and the Second Circuit, the Second Circuit found that these definitions “suggest the act of purchasing or selling securities is the act of entering into a binding contract to purchase or sell securities.”273

In a previous decision, Radiation Dynamics, Inc. v. Goldmuntz,274the Second Circuit held that “the time of a ‘purchase’ or ‘sale’ of securities within the meaning of Rule 10b-5 is to be determined as the time when the parties to the transaction are committed to one another,” or in other words, when there is a “meeting of the minds.”275 Building on this precedent, the Second Circuit elaborated that such a commitment “marks the point at which parties are obligated . . . to perform what they had agreed to perform even if the formal performance of their agreement is to be after a lapse of time.”276And, since “the point at which the parties become irrevocably bound is used to determine the timing of a purchase and sale,” the Second Circuit similarly found that this point “can be used

269Id. at 70-71. 270Id. at 67. 271Id.

272Id. (citing 15 U.S.C. § 78c(a)(13) (2012)). 273Id.

274 Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir. 1972).

275Absolute Activist, 677 F.3d at 67-68 (citing Radiation Dynamics, Inc. v. Goldmuntz, 464 F.2d 876, 891 (2d Cir. 1972)).

to determine the locus of a securities purchase or sale.”277 Transactions are thus domestic when “the purchaser incurs irrevocable liability within the United States to take and pay for a security, or . . . the seller incurs irrevocable liability within the United States to deliver a security.”278

After ruling that the geo location of a security transaction is determined by the locations at which the parties become irrevocably bound to the transaction, the Second Circuit addressed several of the arguments raised by the plaintiffs and defendants. With respect to the defendants’ arguments concerning the foreign residency of the plaintiffs, the Second Circuit held that:

[W]hile it may be more likely for domestic transactions to involve parties residing in the United States, “a purchaser’s citizenship or residency does not affect where a transaction occurs; a foreign resident can make a purchase within the United States, and a United States resident can make a purchase outside the United States.”279

Regarding the plaintiffs’ arguments concerning the location of the broker-dealer, the Second Circuit found that while the location of the broker-dealer may be important in determining whether a transaction was domestic, the location of a broker-dealer by itself does not determine where the parties became irrevocably bound to the transaction.280 Moreover, the Second Circuit could not conclude whether “the identity of the security necessarily had any bearing on whether a purchase or sale was domestic within the meaning of

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